Federal law allows for structured settlement payments to be set up in a way where there is no structured settlements tax, that is no income tax at all. Most likely, if you received a payment for a personal injury case or other lawsuit then the settlement payments are tax free, and, further, any lump sum that you receive from selling those payments would be tax free. But let’s look at some other potential considerations as far as paying income tax and how that might relate to selling periodic payments.
If you received a lump sum payment due to an injury or some legal settlement that money may very well have been free of structured settlement annuity tax.
However, if you were to receive a large sum of money – say a payout for injuries received in a car accident – and then you invested that money and your investments grew, earning interest, you would likely have to pay taxes on those interest earnings. That’s one thing that makes structured settlement payments even better, your initial lump sum is invested in an annuity, it does grow, even if at a modest rate, but if there was no structured settlement annuity tax on the original amount then the interest is tax free as well! And, when you sell structured settlement payments that lump sum will be tax free as well.
Most likely you will have to pay taxes on any money that you have won, such as lottery winnings or casino earnings. These things are taxed as any other income. If you paid your taxes on the entire lump sum up front then you will not pay taxes again when you sell your payments. However, if taxes are deducted regularly, when payments are made, then you may be responsible for paying a lump sum of taxes if you sell these periodic payments. You will want to consult a tax attorney or accountant for detailed advice.
In most cases selling your structured settlement payments will not impact your eligibility for social security or Medicare, however, it could.
Also, you may want to ask if such a payment could impact your food stamps, eligibility for student loan deferment or income based repayment, section 8 status, or any other type of social assistance that you receive.
If you have questions about selling your structured settlement, and what options might be right for you, contact Strategic Capital today.